News from China Is So Bad, It's Good

How can that be? When a faltering economy forces the government to keep pumping in stimulus money, to the delight of the markets, writes MoneyShow's Jim Jubak, also ofJubak's Picks.

Now it’s China leading the "bad news is good news" parade.

The bad news from China today has been enough to lift Chinese stocks—Hong Kong’s Hang Seng index closed up 1.1% on the news—but it hasn’t been bad/good enough to do the same for Europe. The French CAC 40 was up 0.54%, today but the German Dax nudged into negative territory with a 0.02% drop. The Spanish Ibex 35 fell 0.56%, and the Italian FTSE Milan Index was down 0.08%.

The bad news from China is that the country’s economy continued to slow in July. Industrial production growth dipped to 9.2% in July from a 9.5% annualized growth rate in June. Retail sales growth fell to 13.1%, from 13.7% in June.

Going into the numbers, economists had expected to see growth rates edge upward as a result of interest-rate reductions from the People’s Bank of China, as well as actions by the national and local governments to increase infrastructure and other spending.

The hope was that the second quarter’s 7.6% annualized GDP growth rate would mark a bottom for the economy. (That rate of growth is the lowest for China since the worst of the global financial crisis in 2009.)

The “good” in this bad news is that this continued weakness puts more pressure on the People’s Bank to cut interest rates again, and on the government to increase spending to stimulate the economy.

The big drop in inflation reported today certainly gives the central bank and the government plenty of running room. Consumer inflation fell to a 30-month low of 1.8%. That’s well below the government’s target of 4% for 2012.

Producer price inflation—what’s called inflation at the factory gate in China—fell to a 2.9% annualized rate. Nothing to worry about at that level either. Food inflation, always a big concern for Chinese authorities, was a very restrained 2.4% annualized in July.

The betting now is that the People’s Bank will cut bank reserve requirements again, as soon as this month, with a second cut in reserve requirements following relatively quickly and ushering in another interest-rate reduction. The People’s Bank has already lowered benchmark interest rates twice this year—on June 7 and July 5.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio here.